Friday, February 7, 2020

More Recent Buys

Recently, I closed my position in Boeing (BA) because of the company's grim outlook following the grounding of the Boeing 737 MAX. Closing the position reduced DivGro's projected annual dividend income by $246.60.

To replace some of that dividend income, I decided to add shares to two existing DivGro positions with high Chowder Numbers [CDNs]. One stock is a high-quality but low-yielding stock. The other has a lower quality score but offers a generous yield.

This article details these buys.

Background


I'm focusing on buying stocks that are likely to deliver annualized returns of 8%.

According to the Chowder Rule for dividend growth investing, stocks with high dividend growth rates likely will produce high total returns when considering dividend yield as well. Specifically, if the sum of a stock's current yield and its 5-year compound annual dividend growth rate (a.ka. the CDN) provides a sufficient buffer above 8%, then the stock is likely to deliver annualized returns of 8%.

For stocks yielding at least 3%, I look for a CDN ≥ 12, otherwise, I require a CDN ≥ 15. Utility stocks yielding at least 4% get special treatment: I require a CDN ≥ 8. In my ranking tables, I color these favorable CDNs green. 

Assessment


In looking to replace BA, I focused on current DivGro positions with smaller-than-average position sizes and favorable CDNs. (I consider a full position to be about 1% of total portfolio value).

Below is a summary of high-quality DivGro stocks with smaller-than-average position sizes and favorable CDNs:

Rank Ticker Company Yrs VL
Safety
Rank
VL
Fin. 
Stren.
M*
Econ.
Moat
S&P
Credit
Rating
SSD
Divi.
Safety
Qual Yield 5-Yr
DGR
CDN Fair
Val.
Price (Disc.)
Prem.
6VVisa121A++WideAA-99250.59%20.1%  21  188202.508%
7ADPAutomatic Data Processing441A++WideAA97252.03%13.4%  15  169179.406%
10MAMastercard91A++WideA+99240.49%24.6%  25  316329.074%
37JPMJPMorgan Chase91A++WideA-79232.62%16.2%  19  152137.15(10%)
48IBMInternational Business Machines241A++NarrowA65224.21%8.6%  13  173153.96(11%)
49SNASnap-On102A+NarrowA-99212.76%16.3%  19  174156.48(10%)
56ICEIntercontinental Exchange72AWideA89211.17%16.2%  17  9294.183%
61HRLHormel Foods532ANarrowA99201.97%16.0%  18  4247.1812%
63PSAPublic Storage01A+NoneA96203.55%9.2%  13  211225.477%
81AVGOBroadcom103B++NarrowBBB-67164.10%55.5%  60  358316.94(12%)

The table provides quality indicators and quality scores along with key metrics of interest to dividend growth [DG] investors, including years of consecutive dividend increases, the dividend Yield for a recent stock Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

I also provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.

Looking at the 12 candidates, three have CDNs above 20. Broadcom (AVGO) has the highest CDN by far and the stock is trading well below my fair value estimate of $358, so it looks like a strong candidate. Visa (V) and Mastercard (MA) are low-yielding, high-quality stocks with CDN's of 21 and 25, respectively. Both are trading at premium valuations, but I don't mind paying a premium for such high-quality stocks.

In this article, I'm detailing buys of AVGO and V. In an upcoming article, I'll discuss my buy of MA.

Broadcomm (AVGO)


AVGO is trading about 12% below my fair value estimate of $358 per share. The stock yields 4.10% after a recent dividend raise of 23%, so AVGO is a great candidate!

While AVGO's quality score of 16 is on the low-end of my acceptable range (I like 15 and higher), the dividend is considered Safe by Simply Safe Dividends and is rapidly rising:



AVGO enjoys a Bullish Quant Rating at Seeking Alpha [SA], a rating that is confirmed by sell-side analysts. SA authors are Very Bullish:



According to FASTgraphs, since November 2009, AVGO has returned 35.8% on an annualized basis (including dividends) versus the S&P 500's return of 12.8% over the same time frame.

The following chart plots AVGO's share price (black line) relative to the calculated P/E multiple at which the market has tended to value the stock over time (blue line) and the primary valuation reference line (orange line), which is based on one of three valuation formulas depending on the earnings growth rate achieved over the timeframe in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).



My current position stands at 0.63% of total portfolio value, leaving enough room to add about 12 shares to reach a full position. I decided to add 10 shares instead, increasing my position to 30 shares:

2020-01-27Bought 10 shares of AVGO at $312.98 per share:$3,129.78

My initial Yield on Cost [YoC] is 4.15% and the buy adds $130 to DivGro's projected annual dividend income [PADI]. In all, my 30 AVGO shares will deliver annual dividends totaling $390.

The average cost basis of my AVGO position now is $186.19, while the average YoC is 3.44%.

Visa (V)


V has a quality score of 25, making it one of only eight DG stocks with a perfect quality score! V is trading 8% above my fair value estimate of $188 but I'm willing to pay a premium of up to 10% for stocks with quality scores of 23-25. While the stock yields only 0.59%, it certainly makes up for that with a strong 5-year DGR of 20%:


V has mixed but still favorable ratings at Seeking Alpha [SA], and especially the sell-side analysts rate the stock Very Bullish:



From the following FASTgraphs chart it is clear that V is trading above fair value! Nevertheless, this is one of the best-looking charts I've seen in a long time!



Since October 2009, V has returned 27.1% on an annualized basis (including dividends) versus the S&P 500's return of 12.8% over the same time frame. That is an amazing performance! Since opening my position in September 2018, V has returned about 30% on an annualized basis!

I decided to add 33 shares and increase my position in V to 50 shares, which now represents about a full position:

2020-01-27Bought 33 shares of V at $202.08 per share:$6,668.60

My initial YoC] is 0.59% and the buy adds $39.60 to DivGro's PADI. In all, the 50 V shares will deliver annual dividends totaling $60.

My average cost basis is $182.16 and the average YoC is 0.66%.

Concluding Remarks


After selling BA, I used the proceeds to increase my ARGO and V positions to full positions. I have some cash left from earlier sells and I'm planning to increase my MA position to a full position as well.

In summary, I replaced BA (quality score 17) with ARGO (quality score 16) and V (quality score 25), slightly improving the overall quality of my portfolio as measured by the DVK quality scoring system. Furthermore, ARGO and V have very favorable CDNs, so I believe the replacements will perform very well in the future.

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4 comments :

  1. DG -

    Visa will continue to grow absurdly with amazing dividend growth to follow.

    -Lanny

    ReplyDelete
    Replies
    1. Well, I certainly hope so! The stock's performance has been amazing!

      Delete
  2. So far this year I have bought: WFC, D, GILD, UVV, LM, SPG, MAIN, CVS, MMM, WBA, LYB, XOM, PRU, CCL, WRK, IPL, RDS, PFE, UL, UPS, WSM.

    Sold: AYR.

    We´ll see in 5 years if good or bad investments.

    ReplyDelete
    Replies
    1. Thanks for sharing! Those include some solid dividend growth stocks! Of course, there is some overlap with my portfolio, so I'm happy to be a fellow shareholder! All the best with your investments!

      Delete

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